In August 2012, the UAE Securities and Commodities Authority (“SCA”) introduced a new regulatory framework governing the marketing and sale of foreign funds to investors in the United Arab Emirates (the “UAE”). This was subsequently amended on 13 March 2013 to introduce a private placement exemption for a limited category of investors. Neither provided any clarity with regard to the regulation of investment management activities conducted by foreign firms in the UAE and, as such, non-licensed firms have continued to conduct investment management activities in reliance on tolerated practice guidelines.

This is now set to change following the recent release by SCA of Decision No.1 of 2014 Concerning the Regulations on Investment Management (the “Regulation”). The Regulation has been published in the UAE Official Gazette and accordingly is in full force and effect.

The Regulation prohibits investment management activities from being conducted in the UAE in the absence of a licence from SCA. The prohibition extends to all firms, whether they are based inside or outside the UAE, which includes free zones in the UAE.

The Regulation defines “investment management” as the management of securities portfolios for the account of third parties or the management of mutual funds in accordance with the investment objectives and policies defined in the investment management agreement between the investment manager and its client (which includes individuals, corporate establishments and mutual funds).

There is an exemption with regard to financial portfolios owned by federal and local government entities. This is largely in line with the relief provided to non-licensed firms under the Investment Funds Regulation. SCA has confirmed that the exemption does not extend to non-governmental institutions, family offices and high net worth individuals.

The Regulation requires the following criteria to be satisfied by an applicant for an investment management licence:

The applicant must be a legal person in one of the following forms:

a joint stock company incorporated in the UAE with the purpose of conducting investment management business;

a joint stock company incorporated in the UAE which is, amongst other purposes, permitted to conduct investment management business but which is also licensed to deal with securities in accordance with permitted SCA conflict rules;

a local bank or a branch of a non-UAE bank or investment company licensed by the UAE Central Bank;

a branch of a company established in a UAE financial free zone or a branch of a non-UAE company, provided that such branch is licensed to conduct investment activity in the relevant financial free zone or its home jurisdiction and is regulated by a recognised supervisory authority, subject to any other terms or conditions determined by SCA;

the applicant has paid up capital of at least AED 5,000,000, with the exception of local banks and branches of non-UAE banks;

the applicant must provide an on-demand unconditional and unrestricted bank guarantee in an amount of AED 1 million. The guarantee must be issued in favour of SCA by a UAE bank and may not be cancelled without the approval of SCA;

the applicant must pay the licence fees required by SCA, being AED 50,000;

the applicant must appoint competent technical and administrative staff in order to perform the requisite roles pertaining to the business. The Regulation sets out certain fitness for task guidelines in this regard;

the applicant must maintain adequate premises in the UAE and appropriate electronic and software programs and technical systems;

the applicant must maintain an internal control system, including an operational guide for risk management, which guarantees appropriate compliance with the Regulation and associated laws, regulations and rules; and

the applicant must comply with any additional conditions or requirements imposed by SCA.

Applicants may submit an undertaking to meet the conditions set out in 5-8 within a specified time period determined by SCA, provided that the applicant has already obtained approval from SCA.

The Regulation provides for a specific format for the licence application and states that SCA shall issue a decision to approve or reject an application within 30 days from the date of submission. Should SCA fail to issue a decision within 30 days, the application shall be considered rejected. Applicants must wait 6 months following rejection of the first application before submitting a new application.

Licences are granted for a one year period, expiring on the last day of the calendar year. The licensing fee is charged on a pro-rata basis for licences that are granted after the first day of each calendar year.
Licenses must be renewed by submission of an application to SCA no later than 1 month prior to expiry of the existing licence. Renewal fees are AED 25,000. SCA may suspend a licensed firm from renewing its licence if a renewal application is not submitted within the specified period.

Licensed firms are entitled to delegate some of their duties to other licensed investment management firms, subject to a number of provisions, including obtaining the prior approval of the delegating firm’s clients, conflict clearance and continuation of the delegating firm’s responsibilities to SCA and its clients in accordance with the Regulations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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